Trend set to continue, with China's One Belt One Road initiative to boost connectivity

More countries in the Middle East are turning towards the yuan, with China's bid to revive the ancient silk routes expected to give the redback a boost in the region.

President Xi Jinping's recent diplomatic visit to the region also further raised Beijing's economic clout among its resource-rich states.

Recent data by global payment system provider Swift found that Middle East countries Qatar and the United Arab Emirates (UAE) are the most active in using the yuan for direct payments with China and Hong Kong.

Last year, the UAE's use of the yuan accounted for 74 per cent of payments by value to China and Hong Kong, an increase from 69 per cent in 2014. In Qatar, the yuan was used for 60 per cent of such payments, a huge jump from 29 per cent in the previous year.

While Swift did not provide specific data for other Middle East states, experts say more of the region's firms are also expected to turn to the yuan to settle payments, as trade between the two sides increased by more than 50 times over the past two decades.

"Use of the yuan has been rising across the Middle East region over the last few years," noted Mr Sido Bestani, Swift's head of Middle East, Turkey and Africa.

"Adoption has been supported by developments such as the establishment of a yuan clearing centre in Qatar last year - the first in the Middle East - and the recent (agreement) signed between the People's Bank of China and the central bank of UAE to set up yuan clearing arrangements," he added.

China's "One Belt One Road" initiative to boost connectivity is also expected to spur greater yuan adoption, even as Beijing pushes to internationalise the currency. It includes the Silk Road Economic Belt from China, through the Middle East, before ending in Europe, and the 21st Century Maritime Silk Road connecting China with South-east Asia, Africa and Europe.

"(The initiative) is likely to shift China from being the world's largest goods exporter to a major capital exporter, boosting the use of yuan in financial, investment and trade transactions along the (belt and road)," said Mr Sunil Kaushal, Standard Chartered's regional chief executive of Africa and the Middle East.

Already, Beijing's economic clout in the Middle East is growing. Mr Xi announced US$55 billion (S$77 billion) in aid when he swung through the region last month, with visits to Iran, Egypt and Saudi Arabia, China's biggest oil supplier.

Experts say the Middle East is important to Beijing not only because of the Gulf states' energy exports, but also due to the key role the region can play in helping the yuan go global, especially in the pricing of key commodities in yuan, which also minimises trading time and transaction cost.

The Middle East also serves as a de facto financial centre for the African continent, where China has enormous and complex interests, they add.

Said Mr Sunil Veetil, regional head of payments and cash management at HSBC Middle East and North Africa: "Energy still dominates trade between these two regions. The increase of yuan usage to settle oil and gas payments will undoubtedly be the turning point in the internationalisation of the yuan."

But the yuan's climb to greater prominence will be a gradual one. Swift data found that US dollars remain the currency of choice, making up the bulk of payments between Gulf states and China and Hong Kong.

Still, Mr Veetil noted: "Initiatives like establishing swap lines, creating yuan clearing centres in Qatar and UAE, and the recent inclusion of the yuan in the International Monetary Fund's Special Drawing Rights basket of currencies will help countries in the Middle East diversify and reduce dependency on other currencies."

The yuan remained stable in its position as the fifth most active currency for global payments by value and accounted for 2.31 per cent of such payments in December. It is dwarfed by the US dollar's 43.9 per cent share, according to Swift data.

A version of this article appeared in the print edition of The Straits Times on February 05, 2016, with the headline 'More Middle East countries using the yuan'. Print Edition | Subscribe

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